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Devil Take the Hindmost: A History of Financial Speculation
A lively and authoritative look at speculation from early modern times to the present.
Focusing on speculation as it developed in the world's leading stock markets, Edward Chancellor's story starts with the tulipomania in seventeenth-century Holland, then moves to Britain with accounts of speculative manias such as the South Sea Bubble and the Railway Mania. From the mid-nineteenth century, the narrative turns to the United States, with chapters on the Gilded Age, the Roaring Twenties, and the revival of speculation since the early 1970s, then portrays the disastrous Bubble Economy of Japan in the 1980s. Chancellor shows that the impulses that have shaped speculative behavior are at odds with the orthodox theory of efficient markets. His comprehensive history is interspersed with trenchant commentary on speculation in the 1990s, including such current issues as emerging markets, Internet and foreign-currency speculation, rogue traders, the great U.S. bull market, and our current financial predicament.
Focusing on speculation as it developed in the world's leading stock markets, Edward Chancellor's story starts with the tulipomania in seventeenth-century Holland, then moves to Britain with accounts of speculative manias such as the South Sea Bubble and the Railway Mania. From the mid-nineteenth century, the narrative turns to the United States, with chapters on the Gilded Age, the Roaring Twenties, and the revival of speculation since the early 1970s, then portrays the disastrous Bubble Economy of Japan in the 1980s. Chancellor shows that the impulses that have shaped speculative behavior are at odds with the orthodox theory of efficient markets. His comprehensive history is interspersed with trenchant commentary on speculation in the 1990s, including such current issues as emerging markets, Internet and foreign-currency speculation, rogue traders, the great U.S. bull market, and our current financial predicament.
386 pages, Hardcover
First published January 1, 1996
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Displaying 1 - 30 of 235 reviews
February 7, 2016
One of the best economic books I've read in a long time, and I studied economics and read a lot of economic books. A compelling and balanced view of financial speculation that leads to the reasonable conclusion that the overextension of credit is the cause of financial instability. A must read.
December 14, 2012
Great mix on history of financial markets, psychology of speculation and biggest bubbles of all times. Three main lessons for me:
- roots, motives and patterns for excessive speculation were always same, from Ancient Rome until today
- If it's too good to be true- it's a bubble (unfortunately, desire for more wins against logic)
- British and American industrial revolution, technological discoveries and creation of big companies were accompanied by large-scale scams, fraud, insider trading, corruption. Knew about this but was astonished by the scale and mass of those manipulations!
Overall a very interesting read. Written in 1998, seems like not too many people have read it before 2000 technology bubble or 2008 crash....;)
- roots, motives and patterns for excessive speculation were always same, from Ancient Rome until today
- If it's too good to be true- it's a bubble (unfortunately, desire for more wins against logic)
- British and American industrial revolution, technological discoveries and creation of big companies were accompanied by large-scale scams, fraud, insider trading, corruption. Knew about this but was astonished by the scale and mass of those manipulations!
Overall a very interesting read. Written in 1998, seems like not too many people have read it before 2000 technology bubble or 2008 crash....;)
June 14, 2019
Very poorly written and designed book. It is one of the few books I have picked up and have decided not to power through and finish. The author doesn't provide relevant information that is useful to the context of each chapter. He goes on and on about random things at the worst times. His writing attempts to be engaging but does a very poor job and feels like a drag to get through. He uses significant unnecessary footnotes and asterisks that destroy the flow of the book. On top of that, he name drops irrelevant people in financial history in an attempt to make the book more anecdotally sound, but does so in way that makes you feel like he doesn't know anything about history except what's in the journal entries of some obscure witness to a stock frenzy from way back in the day.
If the author reduced this book in size by half, it would be rated more highly...but instead has chosen to abide by the idea that more pages means a better book. That is not the case. This book will not give you a history lesson about speculation that you can use in your own pursuits or as a basis for an intelligent conversation with friends or colleagues.
I am thoroughly disappointed in this book.
If the author reduced this book in size by half, it would be rated more highly...but instead has chosen to abide by the idea that more pages means a better book. That is not the case. This book will not give you a history lesson about speculation that you can use in your own pursuits or as a basis for an intelligent conversation with friends or colleagues.
I am thoroughly disappointed in this book.
This entire review has been hidden because of spoilers.
May 8, 2011
In some sense, this book is more about the great human failings of Greed, 'Follow the Leader' mentality, Fear and Panic - all told through examples from the history of the stock market. To read it as a book on Speculation alone would be missing the point to some extent.
The author sums up his own book in a couple of salient quotes:
"Speculation is the name given to a failed investment and...investment is the name given to a successful speculation"
"When I was young, people called me a gambler. As the scale of my operations increased, I was called a Speculator. Now I am called a banker. But I have been doing the same all along" - Sir Ernest Cassell, banker to King Edward VII."
In short, the book is a history of the various 'bubbles' and their bursts in history from Roman times to 1998. It covers in detail the
(1) the Dutch Tulip Mania of 1637
(2) the British South Sea Bubble of 1720
(3) the U.S. bull market of the 1920s and the Great Depression
(4) the U.S. bull market of the 1980s
(5) the Japanese Bubble of the 1980s and its demise in the 90s.
The story repeats in history following the same pattern. Initially, Greed drives the stock prices high due to some perceived 'new era' as a result of some breakthrough technology, then the 'herd mentality' takes over by everyone following up so as not to miss a 'lifetime opportunity', then Fear takes over as stock prices reach an unsustainable and unjustifiable 'high', finally Panic setting in and stocks are dumped with a rapidity as to bring on a crash.
The author hints at Speculators as the culprit and the need for regulation. But it looks to me that his own book shows that it is endemic to the Free market system because of the above mentioned fundamental human failings. No amount of regulation will be able to stop Speculation. Instead, we have to just learn to overcome our twin traits of Greed and 'follow the leader' mentality.
Prof. J.K. Galbraith had written perceptively about it decades ago in his book on 'Money'. He said that the next wave of speculation always happens when all the effects of the previous bout of speculation fades in popular memory. There is no point in blaming the Regulating authorities. If they intervene when the market is in a boom, everyone will pillory them for hurting growth and stifling the resulting prosperity. If they act after the crash, they will be blamed for 'sleeping on their jobs' and not acting sufficiently in time. However, Galbraith suggested that new regulators can step in every few years and bring on new rules so that speculators do not have enough time to exploit the previous set of rules and bring on a crash. But, I think even this is not feasible because often we find that the bureaucracy, Congress, Senate and the Administration filled by ex-Wall Street honchos. So, it is not in their interest to rein in Wall Street. Saying that we need a fundamental uprooting of the System would make one run the risk of being dubbed a 'communist'! So, Speculation is here to stay and we better learn to live with it.
The book is not a fast paced read. There are voluminous footnotes which distract the reader. Anyone who has read Kindleberger's 'Manias, Panics and Crashes' would find very little new material here.
The author sums up his own book in a couple of salient quotes:
"Speculation is the name given to a failed investment and...investment is the name given to a successful speculation"
"When I was young, people called me a gambler. As the scale of my operations increased, I was called a Speculator. Now I am called a banker. But I have been doing the same all along" - Sir Ernest Cassell, banker to King Edward VII."
In short, the book is a history of the various 'bubbles' and their bursts in history from Roman times to 1998. It covers in detail the
(1) the Dutch Tulip Mania of 1637
(2) the British South Sea Bubble of 1720
(3) the U.S. bull market of the 1920s and the Great Depression
(4) the U.S. bull market of the 1980s
(5) the Japanese Bubble of the 1980s and its demise in the 90s.
The story repeats in history following the same pattern. Initially, Greed drives the stock prices high due to some perceived 'new era' as a result of some breakthrough technology, then the 'herd mentality' takes over by everyone following up so as not to miss a 'lifetime opportunity', then Fear takes over as stock prices reach an unsustainable and unjustifiable 'high', finally Panic setting in and stocks are dumped with a rapidity as to bring on a crash.
The author hints at Speculators as the culprit and the need for regulation. But it looks to me that his own book shows that it is endemic to the Free market system because of the above mentioned fundamental human failings. No amount of regulation will be able to stop Speculation. Instead, we have to just learn to overcome our twin traits of Greed and 'follow the leader' mentality.
Prof. J.K. Galbraith had written perceptively about it decades ago in his book on 'Money'. He said that the next wave of speculation always happens when all the effects of the previous bout of speculation fades in popular memory. There is no point in blaming the Regulating authorities. If they intervene when the market is in a boom, everyone will pillory them for hurting growth and stifling the resulting prosperity. If they act after the crash, they will be blamed for 'sleeping on their jobs' and not acting sufficiently in time. However, Galbraith suggested that new regulators can step in every few years and bring on new rules so that speculators do not have enough time to exploit the previous set of rules and bring on a crash. But, I think even this is not feasible because often we find that the bureaucracy, Congress, Senate and the Administration filled by ex-Wall Street honchos. So, it is not in their interest to rein in Wall Street. Saying that we need a fundamental uprooting of the System would make one run the risk of being dubbed a 'communist'! So, Speculation is here to stay and we better learn to live with it.
The book is not a fast paced read. There are voluminous footnotes which distract the reader. Anyone who has read Kindleberger's 'Manias, Panics and Crashes' would find very little new material here.
February 29, 2016
I enjoyed this book. Insightful. I spent lunch with Chancellor when he was at GMO (2010 or 2011). A pompous fellow, who like to hear himself talk. Was predicting the collapse of China.
July 1, 2022
There have been numerous excellent books on financial market bubbles and busts. Such books excel in either explaining the factors that cause extreme price movements (behavioral and/or policy) or describing the vivid details of the frenzy on the ways up and down or proscribing policy steps to avoid their repeats. In fact, the best of them do all three well. This one does neither.
For most parts, the book reads like verbal descriptions of charts showing extreme price movements. The author cannot stay away from the word "speculators" for long without ever defining how he would separate these "devils" from other types of investors. One feels that the author is against any liquid securities, but he also abhors wild price swings in illiquid assets like art and real estate. There is no support for allocated capital decisions like in Japan, even when the author does not believe in capital allocations done by market forces.
Financial market manias exert enormous costs. Whether this price is bearable for the benefits markets generate is one debate. Still, smarter critics describe how one can reduce the extremes of bubbles in important securities, assets, or instruments without taking away most benefits. Many commentators also recognize that bubbles and busts are an inherent part of capitalism even if one finds a way to reduce liquidity in public markets (as seen in bubbles in private equity now or real estate since time immemorial). The solutions are primarily in policymakers finding the courage to stand against extreme market forces even at the chance of being wrong rather than allowing markets to be. For brave policymakers, the policy tools are not just monetary but more in tax and regulatory areas. Unfortunately, most policymakers refrain from going down these paths. In their absence, bubbles and busts will only become more frequent and extreme given the technology innovations leading to far better market access.
For most parts, the book reads like verbal descriptions of charts showing extreme price movements. The author cannot stay away from the word "speculators" for long without ever defining how he would separate these "devils" from other types of investors. One feels that the author is against any liquid securities, but he also abhors wild price swings in illiquid assets like art and real estate. There is no support for allocated capital decisions like in Japan, even when the author does not believe in capital allocations done by market forces.
Financial market manias exert enormous costs. Whether this price is bearable for the benefits markets generate is one debate. Still, smarter critics describe how one can reduce the extremes of bubbles in important securities, assets, or instruments without taking away most benefits. Many commentators also recognize that bubbles and busts are an inherent part of capitalism even if one finds a way to reduce liquidity in public markets (as seen in bubbles in private equity now or real estate since time immemorial). The solutions are primarily in policymakers finding the courage to stand against extreme market forces even at the chance of being wrong rather than allowing markets to be. For brave policymakers, the policy tools are not just monetary but more in tax and regulatory areas. Unfortunately, most policymakers refrain from going down these paths. In their absence, bubbles and busts will only become more frequent and extreme given the technology innovations leading to far better market access.
February 12, 2018
This history of financial speculation is an interesting look at one of the many negative aspects of human nature. We are a species of gamblers, and speculating in the stock market allows us to gamble while fooling ourselves into thinking that we are contributing something to the economy.
Chancellor shows how we seem to be unable to stop or even recognize reckless speculation for what it is despite the clear pattern established by history: a new technology or financial instrument (or a combo of both) provides a somewhat legitimate reason to be bullish, then things get out of control and the exciting new investment opportunity (railroads, tulips, radios, whatever) becomes grossly overinflated, inexperienced suckers decide they want in on the easy money, cognitive dissonance sets in and negative information is ignored, at some point most people can see that it’s a dishonest scam but they hope to make their money and let the “devil take the hindmost.” Finally, the bubble bursts, and a large group of angry people find themselves ruined.
This book was written before the bursting of the dot-com and housing market bubbles, but they followed the same pattern: from hope to greed to irrational exuberance to fear to despair. You should read this and maybe you’ll recognize the next bubble before it bursts (or maybe you’ll find a way to make money and leave everyone else holding the bag).
Chancellor shows how we seem to be unable to stop or even recognize reckless speculation for what it is despite the clear pattern established by history: a new technology or financial instrument (or a combo of both) provides a somewhat legitimate reason to be bullish, then things get out of control and the exciting new investment opportunity (railroads, tulips, radios, whatever) becomes grossly overinflated, inexperienced suckers decide they want in on the easy money, cognitive dissonance sets in and negative information is ignored, at some point most people can see that it’s a dishonest scam but they hope to make their money and let the “devil take the hindmost.” Finally, the bubble bursts, and a large group of angry people find themselves ruined.
This book was written before the bursting of the dot-com and housing market bubbles, but they followed the same pattern: from hope to greed to irrational exuberance to fear to despair. You should read this and maybe you’ll recognize the next bubble before it bursts (or maybe you’ll find a way to make money and leave everyone else holding the bag).
January 12, 2023
So many crazy financial speculations have happened throughout history. It's kind of easy to think that the stock market was invented sometime in the early 20th century, that's typically as far back as any information goes. A bit before the Great Depression. But markets have existed for centuries.
I didn't find this too interesting. I read it to basically get an appreciation for why you shouldn't just jump on a band-wagon like say Bitcoin. It looks crazy and you feel like you're going to miss the boat. And, yes, some people (who?) are making their millions and billions off of it. But it's not the end of the world, and a higher number of individuals are going to get burned than those that win.
I didn't find this too interesting. I read it to basically get an appreciation for why you shouldn't just jump on a band-wagon like say Bitcoin. It looks crazy and you feel like you're going to miss the boat. And, yes, some people (who?) are making their millions and billions off of it. But it's not the end of the world, and a higher number of individuals are going to get burned than those that win.
April 20, 2015
Very solid, entertaining, and incisive history of financial crises, kind of a more narrative version of Kindlebeger's Manias, Panics & Crashes. I read both as part of my history studies in grad school, and for my first book, "The Case of the Cleantech Con Artist: A True Vegas Tale."
January 25, 2011
More cowbell!
May 7, 2016
Great book on financial speculations from the olden days through today.
May 24, 2022
With three eye-wincing exceptions, this is a fantastic, fantastic book, and a very accessible history into a very opaque part of the financial world in which we all live (or, at least, are tolerated).
I'll start with my issues. I didn’t care for Chancellor describing slaves as being ‘employed’, or this summation of the genocide of white Americans:
‘Settlement of the frontier involved even greater risks, such as fending off Indians and wild animals [...]’
fending off alskdjfhsljdfh
Or this blithe dismissal of the Japanese nation, which, I’m sorry, could be any nation, including America:
‘The Japanese psyche is particularly prone to mood swings, shifting abruptly between elation and despair.’
UM WUT
The book was published in 1999, but I do not give much credence to the ‘of its time’ argument, because you could say that of the current time and I have no patience with espousing those sentiments now. All the same, in the end, this is a book about the stock market, and it’s a really good book on the stock market, so I’m passing over how it’s not a good book on the American genocides.
Francies Quaries, 1635: ‘What’s lighter than the mind? A thought. Than thought? This bubble world.’
Great quote, not about the stock market. This one, however, is:
Fred Schwed: ‘Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money becoming a little.’
Chancellor starts all the way back in the Roman forum, and gives an overview of the first joint-stock companies formed in Amsterdam by refugees fleeing religious wars in mainland Europe. This time also saw the invention of ‘futures contracts’, where an agreement is made to deliver or take delivery of a commodity at some point in the future. You could do this with shares in the East India Company, and take out loans using the shares as collateral to ⅘ of their value. They also invented stock options (right to buy shares at a fixed price during the contract period), and ducaton shares (where you could be poor and buy 1/10 priced shares). Chancellor says these were the first derivatives, in that they derive their value from the underlying asset (the share).
The key thing I learned about Tulipmania is that afterwards, the prices of precious tulips regained their value. The normal ones that people were buying like mad did not. It does prove the points of both Thomas Piketty and Scott Pape that in general the savvy investors come through crashes just fine; it’s the ordinary schmoes who get fucked.
In chapter two, which deals with the 1690s, Chancellor explains discounting. You assume the value of future income, then apply a discount rate related to current interest rates, to ‘reduce’ it to a ‘present’ value. It’s also called the ‘time value of money’ and it’s a way of discounting anticipation. Also, it assumes a lot about the future.
He goes on to say that the speculative paradigm requires a few key factors. One is displacement, eg new investment. Positive feedback increases prices, which draws in new and inexperienced investors. Euphoria reduces rationality, which causes an extension of credit that ultimately leads to financial distress. The social conditions required are greed and minimal government interference, ie, low regulation and corruption.
‘JA Schumpeter observed that speculative manias commonly occur at the inception of a new industry or technology when people overestimate the potential gains and too much capital is attracted to new ventures.’
James Buchan: ‘The great stock market bull seeks to condense the future into a few days, to discount the long march of history, and capture the present value of all the future.’
I have never read about the South Sea Bubble in any detail, so I’m not sure how difficult it’s made out to be by other writers; Chancellor makes it reasonably straightforward in chapter three. Basically, the South Sea company took on the entire British national debt (!) in return for getting interest on the loan. (As Piketty says, companies prefer to take on debt with interest than just hand over taxes, which famously pays zero dividends.) As a ‘sweetener’ the South Sea Company agreed to give the government £7.5 million. What it did was take over a bunch of pensions (annuities) and convert them to shares. It was allowed to issue shares up to a value of £31.5 million (why that value I have no idea). After the 7 and the 31.5 million, anything left was profit. Nowadays, said surplus would be placed in a share premium account and considered part of the capital reserve, but not back then!
So in the mind of the South Sea Company, it wanted to swap as few shares as possible, because then it would have more left over to sell on the market and realise a profit. If the share price was a hundred quid, it would have to change pensions into 315,000 shares and sell the rest. But if the share price was two hundred quid, it would only have to change pensions into 150,000 shares and have loads of shares left to sell for profit. So it started bribing members of government with shares before the public conversion, in order that they wouldn’t force a fixed share price.
The lad running the company, John Blunt, set up a share subscription before he was even legally allowed to, and also offered loans using the shares themselves as capital. He kept a bunch of the stock himself to artificially reduce supply, and the loans allowed people to buy more shares, increasing demand. Hype began. Blunt also sold more than he owned, knowing that eventually the price would fall and he could buy them back cheaper and pay the difference, ie, ‘cover his shorts’. Shorts, I gather, are the shares you buy, usually with borrowed money.
Then the bubble burst, people started madly selling shares, the price then fell because supply increased and demand decreased, the bankers sold mortgaged stock because it was below the cut-off, etc etc. Afterwards, short sales and trades in futures and options were made illegal till the 1900s. Again, the rate of mercantile bankruptcies the following year wasn’t higher than normal; only ordinary people got fucked. Chancellor takes this opportunity to shit on the economists who believe in ‘rational bubbles’, which he calls ‘the greater fool strategy’ by another name.
‘Thomas Guy, the miserly stationer [...] sold [South Sea] shares with a nominal value of £54,000 for £234,000 (repenting a life of avarice, he later used some of the profits to endow the London hospital that bears his name).’
LOL
The next chapter deals with the 1820s and the one-time speculator and novelist, future Prime Minister, Benjamin Disraeli, and his attempts to sell people on emerging market prospects in South America.
‘[...] as the French saying goes, Achétez aux canons, vendez aux clairons.’
Disraeli: ‘Yes we must mix with the herd; we must enter into their feelings; we must humour their weaknesses; we must sympathise with sorrows we do not feel; and share the merriment of fools. Oh yes! To rule men we must be men … Mankind then is my great game.’
‘ “We fear,” [Disraeli] wrote with characteristic flippancy and a great deal of truth, “that the folly of man is not subject matter for legislation.”’
‘Although the shops were overflowing with goods and food was abundant, credit had taken flight. [...] The country, Huskisson remarked, was only forty-eight hours away from barter.’
All speculative bubbles see the formation of many new companies keen to cash in, offering small deposits to new investors. There needs to be plenty of rumours, manipulation by brokers, bribing of the press, and employment of politicians as decoy directors and so on so they won’t use the executive arm as the necessary counterweight. Yay!
In the next chapter we get into railway mania in 1845. Here I discovered what ‘scrips’ are: a share where only part is paid for, the rest left to be ‘called’ when needed (ie when building began). Many people bought more shares than they could pay for, with no intention of answering these calls, as they hoped instead to sell them on at a profit first. You can guess what dominos of shit this resulted in when the construction actually began.
‘According to John Stuart Mill, the seeds of each boom are sown during the preceding crisis, when the liquidation of credit causes asset prices to decline so severely that they become genuine bargains. Their subsequent sharp rise from a low level leads to a revival of speculation. After each crisis, the financial markets invariably shrug off past follies and losses to confront the future with bright optimism and fresh credulity. Capital becomes “blind”, to use Bagehot’s term. Unable to remember the past, investors are condemned to repeat it.’
In chapter 6, on the Gilded Age, he really gets into it – as we draw closer to the present day, he obviously had more sources to employ.
Vanderbilt: ‘Gentlemen, you have undertaken to cheat me. I will not sue you, for the law takes too long. I will ruin you.’ He kept his promise.
Love that for him.
‘When Georges Clemenceau, the future French prime minister, visited the United States after the Civil War, he concluded that the country had passed from a state of barbarism to one of decadence without an intermediate period of civilisation.’
A corner is a concerted attempt to buy enough shares to control their price and push it up (by reducing supply). This aims to catch out bears who sold stock short, hoping to buy back cheaper later, and I guess still owed money on the initial sale. The corner could then demand any price they liked because the short sellers still had to ‘cover’ their positions.
Call loans or margin loans were loans against stock collateral. Brokers used their customers’ stock as collateral, which the bank could recall at any time. There needed thus to be a margin of safety between the loan size, and the market value of the shares. This process of short-term loaning with high interest rates exists to provide money to buy and sell shares from day to day. It also increases stock market volatility, because the set-up is vulnerable to panics and people withdrawing money.
Watering stock is releasing unauthorised shares to drop the share price and thwart corners.
I love this: the ideal of the efficient market allocating efficiently is trumped by ‘mystery, manipulation, and thin margins.’
We then move on to the big kahuna, 1929. Like Galbraith does in his book on the subject, Chancellor emphasises the role of ‘investment trusts’, which held the securities of other companies and were sold as stable investments when they were, in fact, unstable. They loaned their surpluses to the call loan market, increasing demand for stock, capital for stock, and speculation.
Chancellor is mostly interested in his own time, however, the hangover from what he calls ‘cowboy capitalism’ of the 1980s, but what I think is now more generally known as Reaganomics. He points out something extremely important: that the value of ALL money is a consensus. He also contends that, despite prevailing wisdom, increased information (ie from the internet) doesn’t create stable markets or informed investors.
This is where we first meet Milton Friedman and his Efficient Market Hypothesis (snh). He helped usher in concepts like ‘capital asset pricing models’, which helped to suggest that shares have an inherent value. In the 1980s Lewis Rainieri of Salomon Brothers came up with separating bonds from their dividends and selling them separately, and ‘securitisation’ was born. Synthetic mortgage bonds also arrived, wherein the interest and the principal were separated. The principals were divided into those famous ‘tranches’ of repayment schedules, with the Z trache representing those who were the last and least likely to repay their principal. These were toxic waste or junk bonds. Another invention was the debt swap, of interest payments usually between users in two currencies. In 1996, outstanding derivative contracts like these amounted to $50 trillion. Chancellor remarks – in 1999, remember – ‘opinions differ as to whether this stimulated speculation’ OH GOD OH GOD OH GOD.
Also, this is where I finally found out what a hedge fund is. Unsurprisingly: nothing to do with hedgerows. It comes from a ‘hedged derivative position’, where one’s risk is offset by owning the underlying security. Their exposure is balanced between long positions (shares bought) and shorts (shares sold). This theoretically makes them ‘market neutral’. An UNhedged position on stock is highly ‘leveraged’ or in other words, DEBT. In this hedging thing, you can take out loans on stock collateral to 95% of their value, which incidentally has been illegal since the 1930s after such practices caused the 1929 crash. In 1998, hedge funds were worth $120 billion, 5 parts debt to 1 part equity. Um…
And now: leveraged buy outs. The Fed restricted margin debt to 50% post-1929, but this doesn’t apply to indebted (leveraged) buy outs. The interest payment is tax deducible and not subject to margin calls. The seller is not personally responsible for the LBO debt, which can be packaged and sold to others. When it tanks, it doesn’t hit the seller. By the end, the amount of actual equity (as opposed to debt and ‘corporate paper’) invested was FOUR PERCENT.
An absolute shark called Michael Milken came up with ‘high yield bonds’ in order to ‘replace capital with debt’ OH GOD OH GOD OH GOD. These high yield bonds are high yield because the credit rating of the borrower is so low, the interest rates are astronomical. The high yield ‘compensated’ for the high default rate.
‘Investing in a portfolio of speculative bonds, [Milken] claimed, would produce better returns over the log run than a portfolio of triple-A-rated debt issued by the likes of General Motors.’
Warrants are options to buy shares before contract expiry at a set price, used as a sweetener in deals. As the share price increased, warrant value increased, and with low interest payments that resulted in profit. Also, during the South Asia bubble (1990s, chapter 9), if you debt swapped your weak dollars for strong yen, you’d actually pay negative interest.
Leverage is the ratio of debt to equity.
The description of the economic situation of Japan is really interesting, especially as regards the land stock issue, and how they were trading on art (raising the price of French Impressionists by twenty times, and leading to a ‘confusion of investment and consumption') and golf club memberships, of all things. Rich people be crazy.
Hughes: ‘arts prices are determined by the meeting of real or induced scarcity with pure, irrational desire and nothing is more manipulable than desire.’
‘Because finance companies did not wish to realise losses on their loans by selling depreciated paintings, they crated them and stored them away from the public eye. As a result many famous pictures simply disappeared. When the National Gallery in Washington attempted to borrow Picasso’s Les Noces de Pierette for an exhibition in 1997, the museum was unable to locate either the painting or its current owner.’
I AM SICK
‘Indeed, the Japanese have a word to describe the custom by which a government official takes a job in an industry he has formerly regulated: they call it amakaduri or “descent from heaven”.’
I mean, at least they’re honest?
Chancellor points out the moral hazard of assuming governments will take over market risk when businesses are ‘too big to fail’; he calls this phrase a ‘harbinger of crisis’, prophetically.
I also thought this was just too funny:
‘The share price of Amazon.cm, an online bookstore, multiplied 18 times during 1998 (despite the company’s escalating losses). One fund manager described it as “the most outrageously priced equity in the world”, but advised buying the stock nonetheless.’
Chancellor’s concluding advice is as follows: the IMF should become the world’s central bank and lender of last resort (predicting Piketty’s advice to the ECB in 2014). He suggests that currency should be given a fixed value so derivatives could fuck right off (my synopsis). Speculation, he says, is anarchy.
I’ll leave the final words to Dr Mahathir, Malaysian PM, whose country was treated very well by the Western financiers:
‘When [Western speculators] use their big funds and massive weight to move shares up and down at will, and make huge profits from other manipulation, then it is too much to expect us to welcome them … Other than the profits to the traders there is really no tangible benefit for the world from this huge trade. No substantial jobs are created, no products or services enjoyed by average people … I am saying that currency trading is unnecessary, unproductive and immoral. It should be made illegal.’
I'll start with my issues. I didn’t care for Chancellor describing slaves as being ‘employed’, or this summation of the genocide of white Americans:
‘Settlement of the frontier involved even greater risks, such as fending off Indians and wild animals [...]’
fending off alskdjfhsljdfh
Or this blithe dismissal of the Japanese nation, which, I’m sorry, could be any nation, including America:
‘The Japanese psyche is particularly prone to mood swings, shifting abruptly between elation and despair.’
UM WUT
The book was published in 1999, but I do not give much credence to the ‘of its time’ argument, because you could say that of the current time and I have no patience with espousing those sentiments now. All the same, in the end, this is a book about the stock market, and it’s a really good book on the stock market, so I’m passing over how it’s not a good book on the American genocides.
Francies Quaries, 1635: ‘What’s lighter than the mind? A thought. Than thought? This bubble world.’
Great quote, not about the stock market. This one, however, is:
Fred Schwed: ‘Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money becoming a little.’
Chancellor starts all the way back in the Roman forum, and gives an overview of the first joint-stock companies formed in Amsterdam by refugees fleeing religious wars in mainland Europe. This time also saw the invention of ‘futures contracts’, where an agreement is made to deliver or take delivery of a commodity at some point in the future. You could do this with shares in the East India Company, and take out loans using the shares as collateral to ⅘ of their value. They also invented stock options (right to buy shares at a fixed price during the contract period), and ducaton shares (where you could be poor and buy 1/10 priced shares). Chancellor says these were the first derivatives, in that they derive their value from the underlying asset (the share).
The key thing I learned about Tulipmania is that afterwards, the prices of precious tulips regained their value. The normal ones that people were buying like mad did not. It does prove the points of both Thomas Piketty and Scott Pape that in general the savvy investors come through crashes just fine; it’s the ordinary schmoes who get fucked.
In chapter two, which deals with the 1690s, Chancellor explains discounting. You assume the value of future income, then apply a discount rate related to current interest rates, to ‘reduce’ it to a ‘present’ value. It’s also called the ‘time value of money’ and it’s a way of discounting anticipation. Also, it assumes a lot about the future.
He goes on to say that the speculative paradigm requires a few key factors. One is displacement, eg new investment. Positive feedback increases prices, which draws in new and inexperienced investors. Euphoria reduces rationality, which causes an extension of credit that ultimately leads to financial distress. The social conditions required are greed and minimal government interference, ie, low regulation and corruption.
‘JA Schumpeter observed that speculative manias commonly occur at the inception of a new industry or technology when people overestimate the potential gains and too much capital is attracted to new ventures.’
James Buchan: ‘The great stock market bull seeks to condense the future into a few days, to discount the long march of history, and capture the present value of all the future.’
I have never read about the South Sea Bubble in any detail, so I’m not sure how difficult it’s made out to be by other writers; Chancellor makes it reasonably straightforward in chapter three. Basically, the South Sea company took on the entire British national debt (!) in return for getting interest on the loan. (As Piketty says, companies prefer to take on debt with interest than just hand over taxes, which famously pays zero dividends.) As a ‘sweetener’ the South Sea Company agreed to give the government £7.5 million. What it did was take over a bunch of pensions (annuities) and convert them to shares. It was allowed to issue shares up to a value of £31.5 million (why that value I have no idea). After the 7 and the 31.5 million, anything left was profit. Nowadays, said surplus would be placed in a share premium account and considered part of the capital reserve, but not back then!
So in the mind of the South Sea Company, it wanted to swap as few shares as possible, because then it would have more left over to sell on the market and realise a profit. If the share price was a hundred quid, it would have to change pensions into 315,000 shares and sell the rest. But if the share price was two hundred quid, it would only have to change pensions into 150,000 shares and have loads of shares left to sell for profit. So it started bribing members of government with shares before the public conversion, in order that they wouldn’t force a fixed share price.
The lad running the company, John Blunt, set up a share subscription before he was even legally allowed to, and also offered loans using the shares themselves as capital. He kept a bunch of the stock himself to artificially reduce supply, and the loans allowed people to buy more shares, increasing demand. Hype began. Blunt also sold more than he owned, knowing that eventually the price would fall and he could buy them back cheaper and pay the difference, ie, ‘cover his shorts’. Shorts, I gather, are the shares you buy, usually with borrowed money.
Then the bubble burst, people started madly selling shares, the price then fell because supply increased and demand decreased, the bankers sold mortgaged stock because it was below the cut-off, etc etc. Afterwards, short sales and trades in futures and options were made illegal till the 1900s. Again, the rate of mercantile bankruptcies the following year wasn’t higher than normal; only ordinary people got fucked. Chancellor takes this opportunity to shit on the economists who believe in ‘rational bubbles’, which he calls ‘the greater fool strategy’ by another name.
‘Thomas Guy, the miserly stationer [...] sold [South Sea] shares with a nominal value of £54,000 for £234,000 (repenting a life of avarice, he later used some of the profits to endow the London hospital that bears his name).’
LOL
The next chapter deals with the 1820s and the one-time speculator and novelist, future Prime Minister, Benjamin Disraeli, and his attempts to sell people on emerging market prospects in South America.
‘[...] as the French saying goes, Achétez aux canons, vendez aux clairons.’
Disraeli: ‘Yes we must mix with the herd; we must enter into their feelings; we must humour their weaknesses; we must sympathise with sorrows we do not feel; and share the merriment of fools. Oh yes! To rule men we must be men … Mankind then is my great game.’
‘ “We fear,” [Disraeli] wrote with characteristic flippancy and a great deal of truth, “that the folly of man is not subject matter for legislation.”’
‘Although the shops were overflowing with goods and food was abundant, credit had taken flight. [...] The country, Huskisson remarked, was only forty-eight hours away from barter.’
All speculative bubbles see the formation of many new companies keen to cash in, offering small deposits to new investors. There needs to be plenty of rumours, manipulation by brokers, bribing of the press, and employment of politicians as decoy directors and so on so they won’t use the executive arm as the necessary counterweight. Yay!
In the next chapter we get into railway mania in 1845. Here I discovered what ‘scrips’ are: a share where only part is paid for, the rest left to be ‘called’ when needed (ie when building began). Many people bought more shares than they could pay for, with no intention of answering these calls, as they hoped instead to sell them on at a profit first. You can guess what dominos of shit this resulted in when the construction actually began.
‘According to John Stuart Mill, the seeds of each boom are sown during the preceding crisis, when the liquidation of credit causes asset prices to decline so severely that they become genuine bargains. Their subsequent sharp rise from a low level leads to a revival of speculation. After each crisis, the financial markets invariably shrug off past follies and losses to confront the future with bright optimism and fresh credulity. Capital becomes “blind”, to use Bagehot’s term. Unable to remember the past, investors are condemned to repeat it.’
In chapter 6, on the Gilded Age, he really gets into it – as we draw closer to the present day, he obviously had more sources to employ.
Vanderbilt: ‘Gentlemen, you have undertaken to cheat me. I will not sue you, for the law takes too long. I will ruin you.’ He kept his promise.
Love that for him.
‘When Georges Clemenceau, the future French prime minister, visited the United States after the Civil War, he concluded that the country had passed from a state of barbarism to one of decadence without an intermediate period of civilisation.’
A corner is a concerted attempt to buy enough shares to control their price and push it up (by reducing supply). This aims to catch out bears who sold stock short, hoping to buy back cheaper later, and I guess still owed money on the initial sale. The corner could then demand any price they liked because the short sellers still had to ‘cover’ their positions.
Call loans or margin loans were loans against stock collateral. Brokers used their customers’ stock as collateral, which the bank could recall at any time. There needed thus to be a margin of safety between the loan size, and the market value of the shares. This process of short-term loaning with high interest rates exists to provide money to buy and sell shares from day to day. It also increases stock market volatility, because the set-up is vulnerable to panics and people withdrawing money.
Watering stock is releasing unauthorised shares to drop the share price and thwart corners.
I love this: the ideal of the efficient market allocating efficiently is trumped by ‘mystery, manipulation, and thin margins.’
We then move on to the big kahuna, 1929. Like Galbraith does in his book on the subject, Chancellor emphasises the role of ‘investment trusts’, which held the securities of other companies and were sold as stable investments when they were, in fact, unstable. They loaned their surpluses to the call loan market, increasing demand for stock, capital for stock, and speculation.
Chancellor is mostly interested in his own time, however, the hangover from what he calls ‘cowboy capitalism’ of the 1980s, but what I think is now more generally known as Reaganomics. He points out something extremely important: that the value of ALL money is a consensus. He also contends that, despite prevailing wisdom, increased information (ie from the internet) doesn’t create stable markets or informed investors.
This is where we first meet Milton Friedman and his Efficient Market Hypothesis (snh). He helped usher in concepts like ‘capital asset pricing models’, which helped to suggest that shares have an inherent value. In the 1980s Lewis Rainieri of Salomon Brothers came up with separating bonds from their dividends and selling them separately, and ‘securitisation’ was born. Synthetic mortgage bonds also arrived, wherein the interest and the principal were separated. The principals were divided into those famous ‘tranches’ of repayment schedules, with the Z trache representing those who were the last and least likely to repay their principal. These were toxic waste or junk bonds. Another invention was the debt swap, of interest payments usually between users in two currencies. In 1996, outstanding derivative contracts like these amounted to $50 trillion. Chancellor remarks – in 1999, remember – ‘opinions differ as to whether this stimulated speculation’ OH GOD OH GOD OH GOD.
Also, this is where I finally found out what a hedge fund is. Unsurprisingly: nothing to do with hedgerows. It comes from a ‘hedged derivative position’, where one’s risk is offset by owning the underlying security. Their exposure is balanced between long positions (shares bought) and shorts (shares sold). This theoretically makes them ‘market neutral’. An UNhedged position on stock is highly ‘leveraged’ or in other words, DEBT. In this hedging thing, you can take out loans on stock collateral to 95% of their value, which incidentally has been illegal since the 1930s after such practices caused the 1929 crash. In 1998, hedge funds were worth $120 billion, 5 parts debt to 1 part equity. Um…
And now: leveraged buy outs. The Fed restricted margin debt to 50% post-1929, but this doesn’t apply to indebted (leveraged) buy outs. The interest payment is tax deducible and not subject to margin calls. The seller is not personally responsible for the LBO debt, which can be packaged and sold to others. When it tanks, it doesn’t hit the seller. By the end, the amount of actual equity (as opposed to debt and ‘corporate paper’) invested was FOUR PERCENT.
An absolute shark called Michael Milken came up with ‘high yield bonds’ in order to ‘replace capital with debt’ OH GOD OH GOD OH GOD. These high yield bonds are high yield because the credit rating of the borrower is so low, the interest rates are astronomical. The high yield ‘compensated’ for the high default rate.
‘Investing in a portfolio of speculative bonds, [Milken] claimed, would produce better returns over the log run than a portfolio of triple-A-rated debt issued by the likes of General Motors.’
Warrants are options to buy shares before contract expiry at a set price, used as a sweetener in deals. As the share price increased, warrant value increased, and with low interest payments that resulted in profit. Also, during the South Asia bubble (1990s, chapter 9), if you debt swapped your weak dollars for strong yen, you’d actually pay negative interest.
Leverage is the ratio of debt to equity.
The description of the economic situation of Japan is really interesting, especially as regards the land stock issue, and how they were trading on art (raising the price of French Impressionists by twenty times, and leading to a ‘confusion of investment and consumption') and golf club memberships, of all things. Rich people be crazy.
Hughes: ‘arts prices are determined by the meeting of real or induced scarcity with pure, irrational desire and nothing is more manipulable than desire.’
‘Because finance companies did not wish to realise losses on their loans by selling depreciated paintings, they crated them and stored them away from the public eye. As a result many famous pictures simply disappeared. When the National Gallery in Washington attempted to borrow Picasso’s Les Noces de Pierette for an exhibition in 1997, the museum was unable to locate either the painting or its current owner.’
I AM SICK
‘Indeed, the Japanese have a word to describe the custom by which a government official takes a job in an industry he has formerly regulated: they call it amakaduri or “descent from heaven”.’
I mean, at least they’re honest?
Chancellor points out the moral hazard of assuming governments will take over market risk when businesses are ‘too big to fail’; he calls this phrase a ‘harbinger of crisis’, prophetically.
I also thought this was just too funny:
‘The share price of Amazon.cm, an online bookstore, multiplied 18 times during 1998 (despite the company’s escalating losses). One fund manager described it as “the most outrageously priced equity in the world”, but advised buying the stock nonetheless.’
Chancellor’s concluding advice is as follows: the IMF should become the world’s central bank and lender of last resort (predicting Piketty’s advice to the ECB in 2014). He suggests that currency should be given a fixed value so derivatives could fuck right off (my synopsis). Speculation, he says, is anarchy.
I’ll leave the final words to Dr Mahathir, Malaysian PM, whose country was treated very well by the Western financiers:
‘When [Western speculators] use their big funds and massive weight to move shares up and down at will, and make huge profits from other manipulation, then it is too much to expect us to welcome them … Other than the profits to the traders there is really no tangible benefit for the world from this huge trade. No substantial jobs are created, no products or services enjoyed by average people … I am saying that currency trading is unnecessary, unproductive and immoral. It should be made illegal.’
This entire review has been hidden because of spoilers.
March 3, 2025
A super fascinating book that is ultimately about human nature, and how great greed (almost) always comes back to bite you someday. The author goes through 9 different “bubbles” ranging from the Dutch Tulip Mania to the late 1980s Japanese. The Tulip Mania in particular reminds me of the NFT craze we had a couple years ago. Author also teases out a ton of great quotes about human nature, and particularly American culture.
“In a democratic society, such as the United States, where wealth is the ultimate determinant of status, there lingers a constant great of being left behind materially. We may say that the guiding principle of American Society is not to grow richer by absolute terms, but to avoid becoming poorer in relative terms…. Even outside the field of finance, Americans are apt to be unduly interested in discovering what the average opinion believes the average opinion to be. This national weakness finds its nemesis in the stock market.”
“There must certainly be a vast Fund of Stupidity in Human Nature, else men would not be caught as they are, a thousand times over, by some Snare; and while they yet remember their past Misfortunes, go onto court and encourage the Causes to which they were owing, and which will again produce them.”
“In a democratic society, such as the United States, where wealth is the ultimate determinant of status, there lingers a constant great of being left behind materially. We may say that the guiding principle of American Society is not to grow richer by absolute terms, but to avoid becoming poorer in relative terms…. Even outside the field of finance, Americans are apt to be unduly interested in discovering what the average opinion believes the average opinion to be. This national weakness finds its nemesis in the stock market.”
“There must certainly be a vast Fund of Stupidity in Human Nature, else men would not be caught as they are, a thousand times over, by some Snare; and while they yet remember their past Misfortunes, go onto court and encourage the Causes to which they were owing, and which will again produce them.”
May 18, 2020
An impressive piece of scholarship, covering the history of financial bubbles through the ages. The author covers the speculative periods ranging from the Tulip mania of the 1600's, the South Sea bubble of the 1700's all the way till the Internet bubbles of the 1990's. The author's research is incredible, as the voluminous footnotes attest. However, it almost feels overwhelming. Each of these financial bubbles is easily worth a book, and to strike a balance that is a broad sweep while still providing some detail is a difficult task. I'd say the author errs on the side of too much detail, and drowns the reader in some cases. Also, the intricacies of the financial arrangements behind these bubbles - derivatives, options, notes etc. - were way beyond my knowledge, and I suspect beyond most other readers too.
Still, a worthwhile read if you want to learn about the crazy financial periods through history - with each era claiming "this time, its different."
Still, a worthwhile read if you want to learn about the crazy financial periods through history - with each era claiming "this time, its different."
May 20, 2022
The author basically takes you though every major speculation mania (aka market bubble) since the 1640’s where tulips were traded in Holland like meme stocks before coming crashing down. I find it reassuring to know about all these different bubbles and inevitable crashes while we may be going through our very own now. The people and specifics change but humans have been going through the same market cycles for hundreds of years.
One of my favorite parts: During the “South Sea Stock” bubble of the 1720’s, Sir Isaac Newton “…lost £20,000 by selling out too early and then rendering the market at its peak.” He said, “I can calculate the motion of heavenly bodies, but not the madness of people.”
One of my favorite parts: During the “South Sea Stock” bubble of the 1720’s, Sir Isaac Newton “…lost £20,000 by selling out too early and then rendering the market at its peak.” He said, “I can calculate the motion of heavenly bodies, but not the madness of people.”
January 19, 2024
A wonderfully concise history of various speculative bubbles from the tulip mania, to the south sea and Mississippi scandals to the roaring 20s to the Japanese investment boom to LTCM to the bull market of the 1990s. In general Chancellor demurs on passing judgement on the moral implications of speculation but a close reading puts him in the Keynesian camp (more regulation, less speculation). In any case it’s good to have a background on the only perennial truth in markets: the bubble. Worth the read
November 6, 2022
I wish I understood more about finance but more than ever I think that finance is the way it is for just that reason: it's a bunch of made up shit and nobody really knows what's going on.
April 27, 2025
Very detailed and well researched, but it’s a little dense. It gets bogged down a little in the midsection imo.
March 19, 2020
Extremely interesting! I still don't understand derivatives...
The content itself was fascinating, but I did find the book hard to read at times. The stories were great, I was probably just getting lost with some of the numbers because of listening to the audiobook version.
The content itself was fascinating, but I did find the book hard to read at times. The stories were great, I was probably just getting lost with some of the numbers because of listening to the audiobook version.
December 2, 2024
If you are looking for a tour of historic bubbles, then the first 3/4 of the book will serve you well. The last quarter (after the Roaring 20s/Great Depression) felt unfocused and less valuable. Decent reporting, but I was not impressed with the author's insights when he offered them.
January 20, 2021
Phenomenal journey through the history of speculative frenzies, including 17th century tulips, 18th century South Sea craze, 20th century roaring 20s or Japan in the 80s, up to the dotcom era.
The scrupulous reader will note common themes across the manias:
-markets are driven by greed and fomo, no concept of 'margin of safety'
-people across different cultures and centuries engaged in the same ol game
-participants hail from all walks even hundreds of years ago, especially women
-technology that has enabled greater participation has resulted in greater participation
-Chancellor would indubitably be writing about Robinhooders posting FinToks on how easy momentum investing is
Docking this one star for being a little too all over the place, would have loved to see greater thmetic connections / frameworking.
Must read for those who desire an enlightened understanding of markets.
The scrupulous reader will note common themes across the manias:
-markets are driven by greed and fomo, no concept of 'margin of safety'
-people across different cultures and centuries engaged in the same ol game
-participants hail from all walks even hundreds of years ago, especially women
-technology that has enabled greater participation has resulted in greater participation
-Chancellor would indubitably be writing about Robinhooders posting FinToks on how easy momentum investing is
Docking this one star for being a little too all over the place, would have loved to see greater thmetic connections / frameworking.
Must read for those who desire an enlightened understanding of markets.
June 30, 2023
It is fascinating how little the world truly changes over time in some aspects, although to be expected, due to the rigidity of human nature.
July 16, 2019
Anticipates the pricking of the Internet bubble
This is a sobering tome published at exactly the right time. Unfortunately I was too busy salivating at the prospects of quadruple-figure appreciation when I bought Priceline.com at $104 to read it when it came out last year. Now reading it makes for a nice penitence as I contemplate the error of my financial ways while filling out forms for a second mortgage on the ranch.
Just joking. Actually this is a readable and entertaining account from Roman times to the modern hedge fund mania. The usual financial delusions are covered, the tulip mania, the South Sea bubble, the crashes of 1929 and 1987, etc. Chancellor does especially nice surgical work on the Japanese bubble economy of the eighties. The operative mechanism is at first GREED, an emotion that blinds investors, just as jealousy blinds the cuckolded or love the lover, into seeing delusion instead of reality, and persuades them to pay high prices for something of little or no value. Then, when it is seen that the emperor has no clothes, that dot.com megamegabucks has no earnings and isn't likely to have any--ever--the value of the trifle paid so dearly for, begins to fall. Now the emotion of FEAR takes hold. This also blinds the investor. The crash begins, the bubble bursts, and overly-margined plutocrats jump despondently out of the windows of high-storied buildings...
Or shoot up brokerage houses with live bullets. Notice however that when Internet stocks went very far south of the Cape of Good Hope this last year, no bubble burst; rather the sector experienced the slow deflation characteristic of a tire going flat. This was mainly because the margin requirements at brokerage houses are now fifty percent instead of the ten percent that prevailed during the Roaring Twenties. Chancellor makes note of this and other differences that make bursting bubbles less painful perhaps, but no more unlikely since the fundamental human emotions underlying the mechanism that produces speculation have not changed.
--Dennis Littrell, author of “The World Is Not as We Think It Is”
This is a sobering tome published at exactly the right time. Unfortunately I was too busy salivating at the prospects of quadruple-figure appreciation when I bought Priceline.com at $104 to read it when it came out last year. Now reading it makes for a nice penitence as I contemplate the error of my financial ways while filling out forms for a second mortgage on the ranch.
Just joking. Actually this is a readable and entertaining account from Roman times to the modern hedge fund mania. The usual financial delusions are covered, the tulip mania, the South Sea bubble, the crashes of 1929 and 1987, etc. Chancellor does especially nice surgical work on the Japanese bubble economy of the eighties. The operative mechanism is at first GREED, an emotion that blinds investors, just as jealousy blinds the cuckolded or love the lover, into seeing delusion instead of reality, and persuades them to pay high prices for something of little or no value. Then, when it is seen that the emperor has no clothes, that dot.com megamegabucks has no earnings and isn't likely to have any--ever--the value of the trifle paid so dearly for, begins to fall. Now the emotion of FEAR takes hold. This also blinds the investor. The crash begins, the bubble bursts, and overly-margined plutocrats jump despondently out of the windows of high-storied buildings...
Or shoot up brokerage houses with live bullets. Notice however that when Internet stocks went very far south of the Cape of Good Hope this last year, no bubble burst; rather the sector experienced the slow deflation characteristic of a tire going flat. This was mainly because the margin requirements at brokerage houses are now fifty percent instead of the ten percent that prevailed during the Roaring Twenties. Chancellor makes note of this and other differences that make bursting bubbles less painful perhaps, but no more unlikely since the fundamental human emotions underlying the mechanism that produces speculation have not changed.
--Dennis Littrell, author of “The World Is Not as We Think It Is”
February 18, 2017
It is difficult for me to imagine someone reading this book and remaining a true believer in the "efficient market hypothesis" (the notion that the price of a security at any given time reflects all the available information and only responds to new information rather than the "mood" of the market or manipulations of speculators). That markets are beneficial and usually clear, sure, but Chancellor, an ex-banker, gives many examples of ways in which irrationality, group madness, and outright manipulation undermine the price mechanism and lead to financial bubbles, often with disastrous consequences.
The most clever part of the book is the introduction. The author links the madness of financial speculation to Bakhtin's notion of the carnivalesque, pointing out that in the middle ages, it was during fairs and carnivals that laws barring financial speculation were suspended. And, as in carnivals, binges of financial speculation demand a symbolic victim such as Mike Milken or Bernie Madoff.
The arguments in the book are only bolstered by the fact that it was written in 1999 and he mentions credit default swaps and mortgage-backed securities as the possible instruments of a future bubble and crisis.
My only complaint is that the descriptions of the events can be a bit repetitive, even if they are well written. I particularly enjoyed the chapter on Japan in the late 80s and early 90s.
Those looking for practical policy solutions will be disappointed. He seems to view financial speculation as a necessary evil that regulation can do little to stop. He isn't opposed to financial regulation, merely resigned to the fact that it will be an ongoing game of whack-a-mole. This strikes me as a more realistic assessment than those offered by free marked ideologues or quasi-messianic market regulators.
The most clever part of the book is the introduction. The author links the madness of financial speculation to Bakhtin's notion of the carnivalesque, pointing out that in the middle ages, it was during fairs and carnivals that laws barring financial speculation were suspended. And, as in carnivals, binges of financial speculation demand a symbolic victim such as Mike Milken or Bernie Madoff.
The arguments in the book are only bolstered by the fact that it was written in 1999 and he mentions credit default swaps and mortgage-backed securities as the possible instruments of a future bubble and crisis.
My only complaint is that the descriptions of the events can be a bit repetitive, even if they are well written. I particularly enjoyed the chapter on Japan in the late 80s and early 90s.
Those looking for practical policy solutions will be disappointed. He seems to view financial speculation as a necessary evil that regulation can do little to stop. He isn't opposed to financial regulation, merely resigned to the fact that it will be an ongoing game of whack-a-mole. This strikes me as a more realistic assessment than those offered by free marked ideologues or quasi-messianic market regulators.
February 24, 2021
One of the best financial history books I've read - well-written, thoroughly-researched with a balanced and nuanced view on financial speculation, starting from the Exchange Alley in the 1690s all the way through the Japanese bubble economy in the 1980s (it's quite ironic that this book is written in 1998, only a year before the great tech bubble of 2000). The author dives deep into the psychology of speculation, claiming that it's not simply about greed: "the essence of speculation remains a Utopian yearning for freedom and equality which counterbalances the drab rationalistic materialism of the modern economic system with its inevitable inequalities of wealth." The historic recurrence of bubbles reveal several highly correlated external factors, including: (i) technological advances (financial innovation in the late 17th century and again in the 20th century, industrial revolution in the 18th and 19th); (ii) over-extension of credit (partly driven by lax regulation); and (iii) enabling political / economic backdrops (liberal economic ideology, Reganomics, Milken-led junk bond revolution, and most interestingly the Japanese "kamikaze" capitalism in the 80s).
One thing worth remembering is that the word "speculator" in Latin describes a sentry whose job it was to "look out" (speculare) for trouble.
One thing worth remembering is that the word "speculator" in Latin describes a sentry whose job it was to "look out" (speculare) for trouble.
October 23, 2016
I picked up this book because I'm interested in everything that concerns investing and speculation. While there's always a plethora of writings on current events and the latest thing, very few stand the test of time, and so I like reading from an historic perspective.
This book turned out to fit well into the history category - if you're looking for advanced financial analysis you won't find it here, although the author clearly knows what he's talking about. What makes this book so good is the way it explains financial history, mainly through anecdotes. For someone who doesn't like reading fiction, this is the kind of book that still can provide a truly enjoyable read. Even better, Chancellor makes sure to get his facts right, and I'm quite impressed at the work he has gone through to find all the stories and facts. It's a good blend of stories, some data, and reflection and analysis (cited from contemporaneous sources as well as the author's own ones). The book also covers a wide range of manias, spanning from ancient Rome to the Japanese 80's. Chancellor also adds some interesting conclusions on what many bubbles seem to have in common and what thus can set them off in the first place.
Well worth a read for anyone interested in investing and history.
This book turned out to fit well into the history category - if you're looking for advanced financial analysis you won't find it here, although the author clearly knows what he's talking about. What makes this book so good is the way it explains financial history, mainly through anecdotes. For someone who doesn't like reading fiction, this is the kind of book that still can provide a truly enjoyable read. Even better, Chancellor makes sure to get his facts right, and I'm quite impressed at the work he has gone through to find all the stories and facts. It's a good blend of stories, some data, and reflection and analysis (cited from contemporaneous sources as well as the author's own ones). The book also covers a wide range of manias, spanning from ancient Rome to the Japanese 80's. Chancellor also adds some interesting conclusions on what many bubbles seem to have in common and what thus can set them off in the first place.
Well worth a read for anyone interested in investing and history.
June 2, 2019
Good summary. Haven't read Kindleberger's "Manias, Panics and Crashes" so not able to compare which is the better book. Includes an overview (last chapter) of the Japanese 1980s real estate and stock market bubble.
February 17, 2015
The second part of the title itself might deter a lot of readers, but it's only a general hint about the book's contents. Chancellor's book brings to light many incidents that point to a pattern that seems to repeat. A scheming small group of investors starts a bubble, and later less knowledgable investors are lured in after them. The small original group eventually sells out, leaving the ignorant and over-optimistic latecomers holding an investment now worth far less than the price that they paid for it.
Yet there are more kinds of bubbles than merely the pumping and dumping of common stock. The book offers examples of these.
There are some who will refuse to read this book after finding the first favorable quotation of Keynes, but they're depriving themselves of some interesting history.
Yet there are more kinds of bubbles than merely the pumping and dumping of common stock. The book offers examples of these.
There are some who will refuse to read this book after finding the first favorable quotation of Keynes, but they're depriving themselves of some interesting history.
October 18, 2014
Chancellor explores bubbles from the Tulip to the Tech boom of the 90's. As I read this post great recession, I can see the looming derivatives bubble coming. I cannot help but wonder if anyone on Wall Street or in the banking business has ever read the book or even studied market bubbles. The patterns and indicators are the same, from the 1630's to the twenty-first century. Still, people throw their money, or better yet, borrow someone else's money to throw at every bubble that comes along. Read it. Wise up.
Chancellor is readable, not tedious in any way. The bubble stories remain interesting as he dishes on the ship of fools that fuel and participate in each.
Chancellor is readable, not tedious in any way. The bubble stories remain interesting as he dishes on the ship of fools that fuel and participate in each.
October 7, 2009
This book details various financial disasters brought about by the human propensity to think "This time it's different!" Since the formation of modern capitalist economies starting in the Netherlands in the 1600s we've experienced a series of spectacular economic crashes brought about by hubris, greed and stupidity. It's hard to tell whether what is happening to our economy today is tragedy or farce when it is simply the latest in a long line of examples of how humans never learn their lesson.
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